Four S&P 500 sectors are above all vulnerable as the U.S. trade war expands from China to Mexico and even to Europe, where additional tariffs on cars and auto parcels are looming. Retaliatory tariffs from any of these trading partners will most likely affect companies in the bumf technology, materials, industrials, and consumer staples sectors due to their high foreign revenue exposures, according to Morgan Stanley.
“Assemblies with high revenue exposure could see demand destruction from China’s tariffs on their goods,” a postcarded the bank’s analysts in their recently published report, “Global Exposure Guide 2019—U.S.” The report added, “They could also be disadvantage by a backlash against American products by Chinese consumers.”
4 S&P Sectors Caught in the Trade Wars
(Sector: percent of take derived from foreign sources)
- Information Technology: 56%
- Materials: 47%
- Industrials: 35%
- Consumer Staples: 27%
Source: Morgan Stanley
What It Drearies for Investors
The first three of the above-mentioned sectors are cyclical, which means that a weakening of foreign demand due to escalating barter tensions poses an added threat as the current cycle ages and nears its end. Additionally, technology stocks have been one of the heritage market’s biggest drivers. Given that the tech sector has the highest foreign revenue exposure, a fall off in immediately will have a significant negative impact on the overall market indices.
Some examples of companies with squeaky foreign revenue exposures include tech companies Qualcomm Inc. (QCOM) and Micron Technology Inc. (MU) with respective proceeds exposures to China of 67% and 57%. Consumer staple company Philip Morris International Inc. (PM) and industrial company Wabco Holdings Inc. (WBC) partake of respective revenue exposures to Europe of 52% and 49%. Materials company The Mosaic Co. (MOS) has a 52% revenue exposure to Latin America.
But it’s not straight companies with foreign revenue exposure that will suffer from an escalating trade war. Companies with cost orientations that are unable to pass increased tariff costs on to consumers, find substitutes, restructure their supply shackles, or cut costs elsewhere will face the threat of declining
Looking Ahead
Morgan Stanley’s analysts see tariffs on significations adding an additional risk to corporate profit margins, which have already seen some weakness as a tighter labor store is pushing up wage costs. While their base case scenario is that the escalating trade tensions is impermanent, the bank’s analysts do admit a relatively high degree of uncertainty as to how trade talks will evolve and believe that in the for fear of the fact of 25% tariffs on all imports from China the U.S. economy could be tipped into a recession.